advocate for freedom and justice contemporary legal...

Advocate for freedom and justice® 2009 Massachusetts Avenue, NW Washington, DC 20036 202.588.0302

Washington Legal Foundation WLF C

onte

mpo

rary

Leg

al N

otes

ASSERTING COUNTERCLAIMS AND THIRD PARTY CLAIMS IN

FALSE CLAIMS ACT LITIGATION

by Ronald H. Clark Arent Fox PLLC

Washington Legal Foundation CONTEMPORARY LEGAL NOTE Series Number 50 January 2006

TABLE OF CONTENTS ABOUT WLF’S LEGAL STUDIES DIVISION........................................................ ii ABOUT THE AUTHOR................................................................................... iii I. STRIKING BACK: ASSERTING COUNTERCLAIMS AND THIRD PARTY CLAIMS IN FALSE CLAIMS ACT LITIGATION ..............................................1 II. ASSERTING COUNTERCLAIMS IN QUI TAM LITIGATION ........................... 2

A. Early Cases-Contribution and Indemnification ....................................... 2

B. Subsequent Judicial Consideration of The Issue ...................................... 4

C. The Minority Position......................................................................................... 5 III. COUNTERCLAIMS SEEKING “INDEPENDENT DAMAGES” ................................. 6 IV. COUNTERCLAIMS FOR ATTORNEYS’ FEES AND COSTS ..................................... 9 V. THIRD-PARTY CLAIMS FOR CONTRIBUTION AND/OR INDEMNIFICATION.................................................................................11 VI. COUNTERCLAIMS AGAINST THE GOVERNMENT ............................................. 13 A. Permissible Categories of Counterclaims......................................................... 13 B. Rejected Categories of Counterclaims.............................................................. 14 C. Counterclaims Related to the Medicare Program.............................................15 CONCLUSION .............................................................................................. 16

Copyright 8 2006 Washington Legal Foundation ii

ABOUT WLF'S LEGAL STUDIES DIVISION

The Washington Legal Foundation (WLF) established its Legal Studies Division to address cutting-edge legal issues by producing and distributing substantive, credible publications targeted at educating policy makers, the media, and other key legal policy outlets.

Washington is full of policy centers of one stripe or another. But WLF's Legal Studies Division has deliberately adopted a unique approach that sets it apart from other organizations.

First, the Division deals almost exclusively with legal policy questions as they relate to the principles of free enterprise, legal and judicial restraint, and America=s economic and national security.

Second, its publications focus on a highly select legal policy-making audience. Legal Studies aggressively markets its publications to federal and state judges and their clerks; members of the United States Congress and their legal staffs; government attorneys; business leaders and corporate general counsel; law school professors and students; influential legal journalists; and major print and media commentators.

Third, Legal Studies possesses the flexibility and credibility to involve talented individuals from all walks of life C from law students and professors to sitting federal judges and senior partners in established law firms C in its work.

The key to WLF's Legal Studies publications is the timely production of a variety of readable and challenging commentaries with a distinctly common-sense viewpoint rarely reflected in academic law reviews or specialized legal trade journals. The publication formats include the provocative COUNSEL'S ADVISORY, topical LEGAL OPINION LETTERS, concise LEGAL BACKGROUNDERS on emerging issues, in-depth WORKING PAPERS, useful and practical CONTEMPORARY LEGAL NOTES, law review-length MONOGRAPHS, and occasional books.

WLF's LEGAL OPINION LETTERS and LEGAL BACKGROUNDERS appear on the LEXIS/NEXIS

7 online information service under the filename "WLF." All WLF publications are also available to Members of Congress and their staffs through the Library of Congress' SCORPIO system.

To receive information about previous WLF publications, contact Glenn Lammi, Chief Counsel, Legal Studies Division, Washington Legal Foundation, 2009 Massachusetts Avenue, NW, Washington, D.C. 20036, (202) 588-0302. Material concerning WLF's other legal activities may be obtained by contacting Daniel J. Popeo, Chairman.

Copyright 8 2006 Washington Legal Foundation iii

ABOUT THE AUTHOR

Ronald H. Clark is a Partner in the Washington D.C. Office of Arent Fox PLLC. Mr. Clark specializes in False Claims Act litigation, consulting, and expert testimony. From 1982-84 Mr. Clark served as an Assistant United States Attorney in New Jersey; from 1984-95 he was a Trial Attorney and Senior Trial Counsel in the Civil Fraud Section, Civil Division, United States Department of Justice, where he supervised and tried numerous False Claims Act cases, including qui tam Awhistleblower@ actions, particularly in the areas of healthcare and government contracting. Since 1995, his practice has involved primarily representing defendants in FCA cases brought by the Department of Justice and/or relators.

Copyright 8 2006 Washington Legal Foundation

ASSERTING COUNTERCLAIMS AND THIRD PARTY CLAIMS

IN FALSE CLAIMS ACT LITIGATION

by

Ronald H. Clark Arent Fox PLLC

Defendants in suits brought either by the government or by qui tam

plaintiffs (“relators”) pursuant to the False Claims Act, 31 U.S.C. § 3729-33

(“FCA”), frequently inquire of defense counsel if there is some mechanism for

asserting their own claims in response. This is particularly a common occurrence

in qui tam litigation, where the relator often is a current or former employee who

has a personal connection with the defendant. Feelings usually run at a fever

pitch level in qui tam cases, at least initially, and the desire to “strike back” and

draw some relator blood can be irresistible. Defense counsel, however, must be

most careful in advising their clients on this topic, as the area is a mine field

where miscalculation can lead to disaster.

I. COUNTERCLAIMS AND THIRD-PARTY CLAIMS IN NON-FCA LITIGATION Ordinarily, defendants in federal litigation have a number of alternatives

for asserting counterclaims against plaintiffs (including seeking indemnification

and contribution), cross-claims against co-parties, and third-party complaints.

See Federal Rules of Civil Procedure 13 and 14. Particularly significant in this

regard are the so-called Acompulsory counterclaims@ which must be asserted or

are considered waived. See Rule 13(a).

Copyright 8 2006 Washington Legal Foundation 2

II. ASSERTING COUNTERCLAIMS IN QUI TAM

LITIGATION The customary availability of counterclaims for defendants in ordinary

litigation is placed in doubt when a qui tam is involved due to the extraordinary

policy implications manifested in the FCA, its 1986 amendments, and the Act’s

legislative history. Even a cursory review of 31 U.S.C. § 3730 discloses a

substantial commitment by Congress to encourage qui tam actions as a device to

add resources to the Department of Justice=s fraud-enforcement capabilities.

United States ex rel. Newsham v. Lockheed Missiles and Space Co., 779 F. Supp.

1252, 1253 (N.D. Cal. 1991).

For example, relators were made full parties to the litigation (§ 3730(c));

prior government knowledge of the alleged fraud no longer barred a relator

action (§ 3730(e)(4)(B)); the relator=s role in conducting discovery and litigating

the matter was enhanced; the financial rewards were increased and relators were

guaranteed at least 15% of any recovery (§ 3730(d)); and new “whistleblower”

protections were added (§ 3730(h)). Because relators are acting technically on

behalf of the United States, and the clear policy embedded in the FCA is to

encourage such private attorney general activity, it has been suggested by the

relators= bar that allowing defendants to assert any manner of counterclaims

against relators would discourage the initiation of qui tam suits, and thereby

frustrate the intent of Congress. See, e.g., JAMES B. HELMER, JR., FALSE CLAIMS

ACT WHISTLEBLOWER LITIGATION 390 (3d Ed. 2002). Unfortunately, the federal

courts have been quite susceptible to this line of argument.

A. Early Cases — Contribution and Indemnification

From the outset, relators have been overwhelmingly successful in

persuading federal judges that to recognize a right to seek contribution or

indemnification by way of counterclaims in qui tam cases would be contrary to


the legislative policy underlying the FCA. This is evident in the first case to

discuss the question, United States ex rel. Rodriquez v. Weekly Publications,

Inc., 74 F. Supp. 763 (S.D.N.Y. 1947), which has set the pattern for subsequent

judicial consideration of the issue. In this case, the defendant was accused of

cheating the U.S. Postal Service, but the government declined intervention.

Defendant then asserted a counterclaim for indemnification against relator

Rodriquez on the basis that because his responsibilities included keeping abreast

of new postal regulatory developments, any noncompliance by defendant was the

direct result of relator’s own negligence, and this breach duty should be remedied

by indemnification plus attorneys’ fees and expenses. Id. at 764, 768.

While confirming that the relator was an opposing party, even though the

litigation was brought in the name of the United States, the district court

nonetheless dismissed the counterclaim. As the court explained, “To permit the

counterclaim pleaded would set a precedent that would be a strong deterrent to

the institution of genuine informer’s actions.” Id. at 769. The potential

deterrence arises because relators who participated in or contributed to the fraud

would be reluctant to bring an FCA action for fear that their involvement might

lay the basis for counterclaim liability, since the defendant might allege — as here

— that the relator was responsible for the predicate statutory infraction. Further

noted the court, since it was the intent of Congress to encourage qui tam actions,

permitting such counterclaims to be filed against relators would be incompatible

with legislative purpose.

Moreover, the district court was entirely unsympathetic to the argument

that defendant=s counterclaim was compulsory and had to be asserted or deemed

waived. Rather, “[i]f the defendant has a claim against the [relator] he should

pursue his remedy in a direct action, thus permitting the qui tam action to

proceed in accordance with statutory direction.” Id. at 769. The issue of whether

an FCA defendant could counterclaim based on grounds unrelated to the qui tam

complaint’s fraudulent allegations was left open.


B. Subsequent Judicial Consideration of the Issue

Rodriquez-style analysis has set the tone ever since in considering the

question of asserting counterclaims for contribution or indemnification, even

though Rodriquez was handed down long before the 1986 amendments to the

FCA contained in 31 U.S.C. § 3730. It does seem evident, however, that the 1986

amendments further strengthened the impact of the Rodriquez holding and

rationale as other courts have considered the issue.

For example, in the next major case decided on the issue, Mortgages, Inc.

v. United States District Court for the District of Nevada, 934 F.2d 209 (9th Cir.

1991), involving federal loan guarantees, the defendant asserted counterclaims

alleging that the relators “bear significant responsibility for the false statements

in the loan applications.” Id. at 212. The Ninth Circuit concluded after reviewing

the FCA and its legislative history that there was no recognition in the Act that

qui tam defendants could seek indemnification or contribution from relators.

The court considered this significant given the Supreme Court’s decision in Texas

Industries v. Radcliff Materials, Inc., 451 U.S. 630, 639 (1981), denying

counterclaims under the antitrust laws. Looking to the history of the FCA, the

court concluded, “The FCA is in no way intended to ameliorate the liability of

wrongdoer by providing defendants with a remedy against a qui tam plaintiff

with ‘unclean hands’. Congress did not intend to create a right of action for

contribution or indemnification under the FCA.” Id. at 213. Furthermore, the

congressional scheme embodied in the FCA is so comprehensive, courts are

foreclosed from reading any federal common law right to assert counterclaims

into the statute. Mortgages, 934 F.2d at 213-14.

Subsequent judicial consideration of the issue for the most part has echoed

these early holdings that FCA defendants cannot assert counterclaims for

indemnification or contribution against relators. See, e.g., United States ex rel.

Stephens v. Prabhu, 1994 WL 761237, at *1 (D. Nev. Dec. 14, 1994) (“Neither the


FCA nor federal common law provides a right to contribution or indemnification

in a FCA action”). In United States ex rel. Pogue v. Diabetes Treatment Centers

of America, 2004 WL 2009413, at *7 (D.D.C. May 17, 2004), several physician

defendants sought to oppose a proposed settlement between an institutional

defendant, the United States and the relator because, they contended, it would

impact negatively their ability to secure contribution and indemnification. The

district court concluded that since defendants “do not have any rights to

indemnity or contribution under the FCA,” they had no possible rights that could

be impacted by the settlement. See also, United States ex rel. Pogue v. Diabetes

Treatment Centers of America, 2004 WL 2009415, at *2 (D.D.C. May 17, 2004)

(defendants “do not have any indemnity or contribution rights under the FCA”).

C. The Minority Position

Only one district court explicitly has recognized a right to counterclaim for

indemnification or contribution in qui tam cases. The otherwise notoriously

relator-friendly Southern District of Ohio adopted that position in Burch ex rel

United States v. Piqua Engineering, Inc., 145 F.R.D. 452 (S.D. Ohio 1992). Here,

the counterclaims included “breach of contract, breach of duty of loyalty, breach

of fiduciary duty, breach of duty of fair representation and defamation.” Id. at

455-56. The Burch court rejected earlier cases foreclosing counterclaims because

these counterclaims did not allege that the relators had been participants in the

FCA violations.

However, even if the counterclaims did seek contribution or

indemnification, the district court still would have allowed them to be brought.

Its stated rationale for the holding were constitutional considerations of due

process — i.e., otherwise compulsory counterclaims would be forfeited. Id. at

457. To foreclose qui tam defendants from having a forum to hear their case

simply would deny procedural due process. Moreover, the FCA=s § 3730(d)(4)’s

provision for the awarding of attorneys’ fees and costs to a successful qui tam


defendant cannot fully compensate a defendant for all of its damages. While the

due process holding is apparent dictum, it nonetheless raised interesting

contentions. To alleviate any problems, the district court ordered a separate trial

for the counterclaim allegations. Id. at 457. Of equal importance, the Burch court

anticipated the development of the most fundamental exception to the otherwise

pervasive ban on qui tam counterclaims, so-called “independent damages.”

III. COUNTERCLAIMS SEEKING “INDEPENDENT DAMAGES@ An important exception to the judicial ban on counterclaims against

relators was announced in United States ex rel. Madden v. General Dynamics

Corp., 4 F.3d 827 (9th Cir. 1993). In this instance, the defendant filed a

counterclaim against the relator, but sought what the court characterized as

“independent damages.” That is, the requested relief in no way sought to offset

through contribution or indemnification defendant=s potential FCA liability on

the basis of alleged relator wrongdoing leading to the commission of the fraud, as

was the situation in Rodriquez and Mortgages. Instead, the asserted

counterclaims included: “1) breach of duty of loyalty and breach of fiduciary duty,

2) breach of implied covenant of good faith and fair dealing, 3) violations of [the]

California Labor Code [ ], 4) libel, 5) trade libel, 6) fraud, 7) interference with

economic relations, and 8) misappropriation of trade secrets.” Madden at 829.

The district court below concluded that the case was governed by Mortgages and

dismissed the counterclaims.

The Ninth Circuit disagreed, even though in 1991 it had handed down

Mortgages. Unlike counterclaims for indemnification and contribution, these

independent claims, if successful, would not have the effect of offsetting FCA

liability. “Counterclaims for independent damages are distinguishable, however,

because they are not dependant on a qui tam defendant’s liability.” Madden at

830-31. Therefore, there is no “blanket rule” foreclosing qui tam defendants


asserting counterclaims as long as they seek “independent damages.” Unlike the

Mortgages court, this court was concerned about the procedural due process

effect of denying the ability to assert compulsory counterclaims. Reviewing §

3730(d)(4)’s provision for the award of attorneys’ fees and costs to a successful

qui tam defendant, the court concluded that even this relief was inadequate to

fully compensate a defendant for the “actual harm” caused by a relator’s conduct.

Id. at 831.

Nonetheless, the Madden court concluded that even independent

counterclaims can be dismissed if the defendant is found to have FCA liability. In

its view, once liability is established, to allow even independent counterclaims to

proceed would “have the effect of providing for indemnification or contribution.

On the other hand, if a qui tam defendant is found not liable, the counterclaims

can be addressed on the merits.” Id. at 831. This would seem to suggest that the

court was contemplating some manner of Abifurcated@ proceeding, which only

adds to the complexity of the issue.

The Southern District of New York adopted the “independent damages”

rationale in United States ex rel Mikes v. Straus, 931 F. Supp. 248 (S.D.N.Y.

1996). There, after a thorough review of all then existing case authority, the

district court dismissed counterclaims predicated upon the relator’s “alleged

participation in the submission of false claims in violation of the FCA,” i.e.,

contribution and indemnification, because such claims are foreclosed under the

Act. Id. at 261. Interestingly, the court also rejected the defendants’ contention

that 31 U.S.C. § 3730(d)(3), which provides for the limiting of a relator’s share of

any recovery should the district court find that person “planned and initiated the

violation of [the FCA] upon which the action was brought,” can furnish qui tam

defendants with standing to assert a counterclaim. The district court instead

placed reliance upon Mortgages, 934 F.2d at 213: “The FCA is in no way intended

to ameliorate the liability of wrongdoers by providing defendants with a remedy

against a qui tam plaintiff with ‘unclean hands.’” Straus at 262.


However, an additional counterclaim had been alleged predicated upon

extortion. Since this claim sought damages “independent” of contribution and

indemnification, it did not run afoul of the long line of cases otherwise

foreclosing counterclaims in qui tam cases. That is, the extortion counterclaim

did not seek to offset the defendant’s FCA liability. The key test to distinguish the

two types of counterclaims is whether the claim is “dependent upon a qui tam

defendant’s liability.” That is, if the defendant is found liable, then the

counterclaims must be dismissed. Therefore, much as the Burch court had

suggested, the district court ordered that any surviving counterclaim must be

tried separately to protect the defendants’ right of procedural due process. Id. at

263 & n. 7.

The Madden holding recently was reaffirmed in United States ex rel.

Hartman v. Allegheny General Hospital, 2005 WL 2106627, at *5 (W.D. Pa. Aug.

26, 2005). There, the district court rejected the relator=s contention that “[a]s a

rule, counterclaims are not permitted in qui tam actions. (citing cases).” In

response, the district court asserted: “There is no such rule.” Further the district

court then succinctly restated the Madden rule:

Defendant=s counterclaim does not seek contribution from plaintiff for the

damages caused by the allegedly false claims themselves. Instead, defendant

seeks damages on a wholly unrelated claim. Counterclaims that seek damages on

claims unrelated to the allegedly fraudulent claims under the False Claims Act are

permitted [citing to Madden].

Whether this distinction in practice is capable of fluid application remains

to be seen.

Another interesting recent case of note is United States v. Cancer

Treatment Centers of America, 350 F. Supp. 2d 765 (N.D. Ill. 2004). After filing

her complaint, the relator was greeted by a counterclaim alleging breach of

fiduciary duty, breach of confidentiality agreement, and conversion. These


allegations arose out of the relator having responded to a government subpoena

seeking the defendant=s records, prior to filing her action, and without informing

any of her superiors.

As is standard in these cases, the relator contended that the counterclaim

had been brought in retaliation for the qui tam action, and therefore to allow it to

proceed would be contrary to the FCA=s policy of encouraging such actions to be

filed. The district court did dismiss the breach of confidentiality and conversion

counterclaims, despite some innovative arguments put forward by the defendant

as to why these claims were not connected with the qui tam complaint. However,

the court declined to dismiss the breach of fiduciary duty counterclaim.

Two considerations led to the rejection of relator=s contention. First, noted

the court, while the “FCA does encourage and protect individuals who file qui

tam actions ... nowhere does it condone or shield individuals who receive and

respond to subpoenas that are not theirs to address.” In addition, the relator had

responded to the subpoena, secretly, prior to filing her complaint. Id. at 770-71.

Any potential for developing this authority into a device to circumvent the

reluctance of district courts to entertain FCA counterclaims appears severely

limited by the unique fact pattern involved.

While it appears that the “independent damages” rationale continues to be

viable, the causes of action truly have to be independent of the FCA complaint in

order to survive a motion to dismiss.

IV. COUNTERCLAIMS FOR ATTORNEYS’ FEES AND COSTS It is not clear at the present whether a defendant may assert a counterclaim

against a relator predicated on 31 U.S.C. § 3730(d)(4), which provides:

(4) If the Government does not proceed with the action and the person bringing the action conducts the action, the court may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in


the action and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for the purposes of harassment. (Emphasis added).

Awards made under this section are separate and apart from routine costs

sought through a bill of costs filed with the Clerk of the Court. See United States

ex rel. Lidenthal v. General Dynamics Corp., 61 F.3d 1402, 1413 (9th Cir. 1995).

It is essential to recognize that a successful defendant is only entitled to an

award of fees and expenses if it can be demonstrated that the relator’s action was

“clearly frivolous, clearly vexations, or brought for the purposes of harassment.”

The infrequent awards under Section 3730(d)(4) demonstrate that in most cases

it will be extremely difficult to establish to the district court’s satisfaction that

these stringent criteria have been satisfied.

Pertinent legislative history is limited and does not address the

counterclaim issue. For example, the Senate Report on the 1986 Amendments to

the FCA notes:

The Committee added this language in order to create a strong disincentive and send a clear message to those who might consider using the private enforcement provision of this Act for illegitimate purposes. The Committee encourages courts to strictly apply this provision in frivolous or harassment suits as well as any applicable sanctions available under the Federal Rules of Civil Procedure. S. Rep. No. 345, 99th Cong. 2d Sess. 29 (1986) (emphasis supplied), reprinted in 1986 U.S.C.C.A.N. 5266, 5294.

Thus far only two decisions have addressed this issue. In Mikes, the

district court denied the defendant=s ability to assert such a counterclaim as being

premature. “If and when defendants prevail in this action, the court will

entertain defendants’ application for fees and costs.” Mikes, 931 F. Supp. at 262.

By contrast, in United States ex rel. Cooper v. Gentiva Health Services, Inc.,

2003 WL 22495607, at *20 (W.D. Pa. Nov. 4, 2003), the court left the door ajar a


bit. While the court granted summary judgment against Gentiva Health Service’s

§ 3730(d)(4) counterclaim, it apparently was more concerned about the lack of

substance supporting the allegation than whether it could be asserted via

counterclaim. It will be interesting to see how this issue works itself out,

especially given the relator’s bar, which argues vociferously that such fee awards

are contrary to the public policy designed to encourage qui tam actions.

V. THIRD-PARTY CLAIMS FOR CONTRIBUTION AND/OR INDEMNIFICATION Many of the same policy concerns that have foreclosed counterclaims

against qui tam relators for contribution or indemnification have been recognized

by the courts to bar third-party claims designed to accomplish the same objective.

This rule prevails whether the litigation is generated by a qui tam complaint or

involves solely an action initiated by the United States. Israel Discount Bank,

LTD v. Entin, 951 F.2d 311, 315 (11th Cir. 1992) (dictum).

In United States v. Kennedy, 431 F. Supp. 877 (C.D. Cal. 1977), defendants

had been sued under the FCA by the United States. Defendants then filed a third-

party complaint seeking indemnification. The district court, however, dismissed

the third-party complaint: “If defendant and third party plaintiffs are liable under

the Act, they are not entitled to indemnification from the third party defendant,

even if it can be proven that he too would have been jointly and severally liable

under the FCA.” While the district court cited no authority to substantiate this

position, it is almost a certainty the court was basing its decision on Rodriquez

and its progeny which, even by this point, had become accepted principles of law.

Kennedy and Entin, in turn, were relied upon in United States v. Nardone,

782 F. Supp. 996, 999 (M.D. Pa. 1990). Nardone had been found guilty on

criminal charges of making false statements and false claims to a federal agency.

Invoking the stringent collateral estoppel provision of the FCA, 31 U.S.C. §

3731(d), the government moved for summary judgment in a subsequent FCA


action. Nardone filed both a counterclaim and a third-party claim for

indemnification. The district court not only denied the third-party claim, but also

refused to consider Nardone=s contention that to deny him the ability to assert it

would “deprive him of property without due process of law,” due to his failure to

cite any authority in support of the argument. Without any discussion, the

counterclaim against the government also was dismissed.

The established rule is the same when the third-party complaint seeks to

recover contribution under state law. The FCA pre-empts any right to common

law contribution under state law because of the strong policy prescriptions

contained in the Act. As the district court explained in United States v. Warning,

1994 WL 396432, at *8 (E.D. Pa. 1994):

In the instant case, a right to contribution under state law would conflict with the purposes of the False Claims Act. As the Ninth Circuit stated in Mortgages, the Act was designed to deter future misconduct and to compensate the government. This goal would be undermined by a right to contribution under state law in the same way as it would by a right to contribution under federal law. Accordingly, the Court concludes that the same reasons that militate against a right to contribution under federal law militate in favor of federal preemption of any right to contribution under state law.

Therefore, it appears dubious given the policy-based approach

implemented in both Mortgages and Warning that any ability to invoke state law

causes of action as FCA third-party claims will be recognized by federal district

courts.

Of course, as is to be expected, the same rule barring third-party

contribution in cases brought by the Department of Justice controls in qui tam

cases as well. See, e.g., United States ex rel. Public Integrity v. Therapeutic

Technology, Inc., 895 F. Supp. 294, 296 (S.D. Ala. 1995). Public Integrity asserts

a number of policy justifications for the rule, not the least of which is that since


third-party claims are not compulsory counterclaims, they will not be waived if

dismissed in a FCA action.

VI. COUNTERCLAIMS AGAINST THE GOVERNMENT

Counterclaims against the United States in FCA actions are governed by a

separate set of rules and separate policy considerations. The name of the game

here is the enigmatic concept of “sovereign immunity” which plays just as much

of a role in FCA litigation as other types of proceedings. Nonetheless, certain

categories of counterclaims against the government have been recognized by the

courts in FCA actions.

A. Permissible Categories of Counterclaims

The most well established ground for counterclaims against the

government, including FCA actions, is the doctrine of recoupment which can

“defeat or diminish the sovereign’s recovery.” United States v. Agnew, 423 F.2d

513, 514 (9th Cir. 1970); see also United States v. Dalm, 494 U.S. 596, 611 (1990).

That is, by initiating a suit under the FCA, the government waives its sovereign

immunity as to counterclaims which satisfy the definition of recoupment.

However, the recoupment counterclaim must satisfy three conditions: “(1) the

claim must arise from the same transactions or occurrence as the government=s

suit; (2) the relief sought must be of the same kind or nature as the

[government=s] requested relief; and (3) any [offset] damages sought cannot

exceed the amount sought by the government=s claim.” United States v. Ownbey

Enters., Inc., 780 F. Supp. 817, 820 (N.D. Ga. 1991); see also, United States v.

Forma, 42 F.3d 759, 764 (2d Cir. 1994).

As to be expected in this area, there are significant limitations even when

invoking the recoupment rationale. First, if the FCA action was brought against a

government contractor, then any recoupment counterclaim is governed by the

Contracts Disputes Act, 41 U.S.C. § 605(a) (“CDA”). The CDA mandates that the


contractor must first submit a written claim to the contracting officer for a final

decision before asserting the counterclaim. Failure to comply with this

requirement will result in the dismissal of the counterclaim. United States v. The

Intrados/International Management Group, 277 F. Supp. 2d 55, 63-64 (D.D.C.

2003). While the CDA vests exclusive jurisdiction in the Court of Federal Claims

to hear appeals from contracting officer decisions, if a valid recoupment

counterclaim is filed in an FCA action, the district court will entertain jurisdiction

pursuant to Federal Rule 13(a). Id. at 63 & n. 6. As long as the counterclaim is a

valid one for recoupment, it should not be barred by the $10,000 jurisdictional

bar contained in 28 U.S.C. § 1346(a)(2). United States v. Livecchi, 2005 WL

2420350, at *19-20 (W.D.N.Y. Sept. 30, 2005).

Some FCA defendants have attempted to invoke the Federal Tort Claims

Act, 28 U.S.C. § 2674 (AFTCA@), as a basis for their counterclaims. While case

authority is scant, that which does exist suggests that this approach may only be

successful if the alleged tort offense has not been excluded from the FTCA=s

waiver of sovereign immunity. See § 2680(a). In addition, an administrative

claim also must be filed as a condition precedent to a district court having

jurisdiction. See § 2675. United States v. Chilstead Building Co., 18 F. Supp.2d

210, 214 (N.D.N.Y. 1998).

B. Rejected Categories of Counterclaims

Any counterclaim asserting breach of contract or seeking contractual

remedies in excess of $10,000 (i.e., not seeking recoupment) almost certainly will

be dismissed for lack of jurisdiction on the basis of the Tucker Act, 28 U.S.C. §

1491(a)(1), which vests sole jurisdiction over such claims in the Court of Federal

Claims. Section 1346(a)(2), of title 28, however does vest jurisdiction over claims

under $10,000 in the district courts so they may be brought as counterclaims.

See Federal Rule 13(d). Furthermore, 28 U.S.C. § 1367 supplemental jurisdiction

is not available to circumvent this limitation. See, e.g., United States v. Cushman


& Wakefield, Inc., 275 F. Supp. 2d 763, 775-6 (N.D. Tex. 2002); United States ex

rel. Fallon v. Accudyne Corp., 921 F. Supp. 611, 617-8 (W.D. Wisc. 1995), aff=d, 97

F.3d 937 (7th Cir. 1996).

Similarly, FCA defendants cannot predicate a counterclaim against the

United States on the Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202; Federal

Rule 57. This is because the Declaratory Judgment statute is procedural and does

not expand the jurisdiction of the district court. Moreover, success under the

Declaratory Judgment statute could result in potential damages far in excess of

$10,000. United States v. Intervest Corp., 67 F. Supp. 2d 637, 643 (S.D. Miss.

1999). It has also been held that the Mandamus Act, 28 U.S.C. § 1361, likewise

does not waive the federal government=s sovereign immunity. Thomas v. Pierce,

662 F. Supp. 519, 524 (D. Kansas 1987).

C. Counterclaims Related to the Medicare Program

Another important limitation involves cases related to Medicare, no small

consideration given that such cases predominate qui tam filings in recent years.

A Medicare contractor or provider seeking to counterclaim against the

government for offsets, must contend with 42 U.S.C. § 405(h). This section

always has posed a virtual lethal roadblock to any efforts by health care providers

to sue Medicare to correct incorrect fiscal intermediary payment decisions or to

contest other aspects of Medicare payment policy. It poses the same

jurisdictional difficulties regarding counterclaims. Section 405(h) as it applies to

Medicare reads:

Finality of [Secretary’s] decision

The findings and decision of the [Secretary] after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decisions of the [Secretary] shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the [Secretary] or any officer or employee thereof shall be


brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter.

This section is made applicable to the Medicare Act via operation of 42

U.S.C. § 1395ii.

The Department of Justice (“DOJ”) has maintained consistently in

litigation that no provider can sue the Secretary of Health and Human Services

(“HHS”) or the United States regarding a coverage decision unless and until the

provider has exhausted the dazzling range of administrative remedies

enumerated in HHS’s regulations. Several district courts have held that any

counterclaim seeking set-offs against the Department of Health and Human

Services relating to Medicare claims must comply with § 405(h) or face dismissal.

United States ex rel. Kirsch v. Armfield, 56 F. Supp.2d 588, 592-3 (W.D. Pa.

1998); United States v. Royal Geropsychiatric Services, 8 F. Supp. 2d 690, 696-7

(N.D. Ohio 1998).

CONCLUSION

While it is entirely too broad a statement to declare that counterclaims can

never be brought in FCA/qui tam cases, defense counsel must nonetheless be

most careful in advising their clients. This is particularly true since emotions can

run high and the client may be willing to tolerate a higher level of risk than

otherwise. Careful explanation of the various competing concepts and the fairly

bright line rules established in the case law should be sufficient to restrain even

the most fervid client from undertaking ill-advised aggressive action in the form

of defective counterclaims. There does, happily, remain the category of

“independent damages” against relators, and several situations in which the

United States has waived its sovereign immunity. But most likely, the situation

where appropriate counterclaims can be asserted will remain “few and far

between.”

advocate for freedom and justice contemporary legal...

Documents